Bangko Sentral ng Pilipinas (BSP) Governor Felipe M. Medalla said the inflation rate is not expected to breach eight percent in November or December, after climbing to 14-year high at 7.7 percent in October.
“I’m willing to bet a lot that (inflation) will not exceed eight percent. It might, but even money, I will bet that it will not,” said Medalla on Thursday, Nov. 17, right after announcing the latest BSP rate hike and adjustments to the inflation's three-year forecasts.
“Bet on it not exceeding eight percent (and) even if it does, it will start going down by next year. Our own forecast is that by the second half of next year, inflation will actually be closer to three than to four. Of course that’s assuming that there are no new supply shocks,” said the BSP chief.
Based on the latest November 2022 Monetary Policy Report (MPR), which was presented during the monetary policy briefing, the BSP expects inflation to average at 5.8 percent for 2022 and 4.3 percent for 2023 – both forecasts are above the government target range of two percent to four percent. By 2024, the BSP sees inflation slowing to 3.1 percent.
The inflation rate, which is an average of 5.7 percent as of end-October, is expected to peak in November or December. In October, the 7.7 percent inflation rate was a significant jump from 6.9 percent in September.
Medalla noted the factors that contributed to the high October inflation were mostly due to one-off shocks and that the tendency of rising food prices is that even if prices do not go down, the “rate of increase eventually normalizes.”
Medalla has said that the central bank will maintain the necessary interest rate differential between US Federal Reserve rates and the BSP policy rates of least 100 bps, to temper US interest rates’ impact on the country’s inflation and exchange rate.
By matching US interest rates’ aggressive increases, the BSP will also effectively curb inflationary pressures.
The peso vis-à-vis the US dollar has appreciated back to the P57 level this month after hitting P59 in September and October.
BSP’s presence in the spot market has prevented the exchange rate from breaking past P59. As a matter of policy, the BSP’s intervention in the exchange rate market is limited only to tempering sharp fluctuations and managing its volatility.
Since May this year, the BSP has raised the key rate by a cumulative 300 bps through six policy meetings in a row including one off-cycle rate hike in July. The current BSP rate is five percent.
Based on the MPR, the BSP sees inflation peaking in the last two months of 2022, but expects the inflation path to return to within the target band by the third quarter next year and will approach the lower end of the range by the mid-2024.
In a survey of private sector economists, the BSP noted that inflation expectations further increased.
The forecast as of November by 22 economists surveyed by the BSP, said they see inflation averaging at 5.5 percent for this year, 4.9 percent for 2023 and four percent in 2024.